5 Reasons Why Cash might be Our Greatest Enemy in Africa

Unlike Sweden and most developed nations where cash transactions account for less than 10% of all transactions, where debit and credit cards, digital wallets, electronic transfers and other digital payment methods are preferred to cash, most African countries still operate a cash-driven economy. According to a report, 90 - 95% of all transactions in these countries are by cash, and even then, 80% of card transactions are to withdraw cash. Ironically, this phenomenon is interpreted as a goldmine of opportunities and innovation for banks and fintech alike. 

Evidently, in 2020, the fintech industry received over 50% of the total investments made in African startups. Governments, banks and telecommunication companies are also doubling down on efforts to introduce and facilitate the adoption of digital payment solutions with the aim of converting the large informal retail sector into the formal sector through financial inclusion. Projects like Kenya's M-PESA, Liberia's adoption of mobile money and MasterCard's collaboration with the Tanzanian and Nigerian governments envision African countries where merchants and customers irrespective of their geographical locations can easily and seamlessly complete business transactions online and offline and with little as a phone number or single account number that can be operated across platforms. That is, more people can be onboarded to a financial service system with more reach and access to financial convenience. The participation of more people in the financial system will increase overall economic activities and ultimately lead to growth.

Think of a rural farmer in the frontier villages of Southwestern Nigeria where communication technology is almost inexistent even in this 21st century. He has to travel uncomfortable miles to the nearest town to sell his produce and since he does not have a bank account, he heads back to his village with the day's proceeds, risking losing the cash to road thieves or other casualties. If you're reading this, you probably understand that there are several ways this farmer's life can be made easier, starting from opening a deposit account to keep his money, using mobile money transfer to collect payments or social mobile payment platforms to confirm customers' orders instead of travelling every day. However, in the informal commercial sector which makes up the bulk of Africa's economy and consists of people similar to the farmer described above, cash is king and digital payments sound like a futuristic fantasy.

Apart from being a field of opportunities and a drive for innovation, the experiences of the COVID-19 pandemic further drive home the insufficiencies of a cash-driven economy. As a result of the pandemic restrictions, many businesses, especially those without access or capacity to switch to online platforms, were closed. While the closure of the majority of business activities adversely affected the economy, the inability to conduct simple business transactions because of physical restrictions in a so-called digital age pointed to a problem in the financial services system that must be fixed if businesses are going to thrive in this new global era of digital business.

Why should cash be dethroned?

From this discussion, it can be submitted that as long as cash holds supreme in the African financial industry, financial inclusion -- which is the key to economic advancement and accommodation of financial innovation -- will remain unachievable. The justification for this submission, which is the point of this article, can be understood in terms of broken-down reasons why cash impedes Africa's future:

• Cash cannot be easily tracked - Whereas digital transactions can be easily recorded and stored, the incoming and outgoing of paper money cannot be easily tracked. Most unbanked people do not record data that can help understand their cash flow or money behaviour. This can affect access to funds in a couple of ways. First, the presence of data to analyze business growth and provide grounds for future income predictions signifies transparency to potential investors. Where numbers are not available to inform decisions, investors will be wary, hesitant or even discouraged. Also, since cash flow is not tracked, credit history cannot be created. That is, businesses will be unable to receive lending or credit facilities as their creditworthiness cannot be determined. Consequently, businesses cannot receive funding and on a larger scale, economic activities are stunted.
• Cash is expensive: On average, it costs an economy 1.5% of its GDP to maintain cash. Apart from financial resources needed to print, transport, store and secure cash, time and energy are also expended for it to be safely and adequately circulated. According to a report, it takes bout 35 days for the average B2B payment cycle to be completed. Also, transferring money to the sub-Saharan region of Africa takes about 8% of the transfer amount. From the perspective of the less costly options that digital transactions offer, cash is almost wasteful. Furthermore, the time spent depositing and withdrawing cash, processing invoices, etc. can be better spent on other important tasks while electronic payments complete the processes automatically.
• Cash excludes the majority of the population from the financial system: In Sub-Saharan Africa, the informal economic sector is larger than the formal sector. The street hawkers, roadside shops, and open market stalls are where consumers across all income levels purchase their goods, mostly with cash. While some merchants pay license and registration fees to local authorities, the businesses are not taxed as formal ones. Hence, they are not recognised as part of the formal financial system and are excluded from accruing benefits. While they act as safety nets and provide labour for the formal sector, their contribution to the economy does not fully reflect in growth metrics such as the GDP. The use of digital payments will be a potential entry point into the formal financial sector. However, since the sector operates mostly with cash, it cannot take up the opportunity.
• Cash is unsecured: Like the instance of the rural farmer cited earlier, cash holders risk losing their money to thievery in the process of attending to their business or commuting from one place to another. African countries like Nigeria are characterised by high crime rates, especially robberies. These crimes thrive with the consistent availability of cash. Cardholders are also not spared from fraud and ATM-point thefts. As people lose money to stealing and pilfering, this is a systematic if not subtle decrease in revenue that has more significant effects on purchasing power.
• Cash does not aid globalization: As global connectivity is reaching wider and getting stronger, money is an important medium for building relationships across borders. From people sending money to their relatives back home to business owners completing sales across continents, these are commercial activities aiding and aided by globalization. However, cash in terms of paper currency is limited. It has to be exchanged and regulated through processes before crossing borders, sometimes taking a lot of time. The slow process negates the "fast communication" feature of globalization and in areas where the exchange bureau is inaccessible, the people are cut off from the global financial community.

In this article, we have looked at the shortcomings of cash and how they slow down economic growth in Africa. While these shortcomings are still very prevalent in most African cities and rural areas, it is important to recognize solutions that have been offered to mitigate them and set Africa's economy on a trajectory of global relevance. Some solutions sponsored by governments have been mentioned above. Products such as a single continental currency, digital currencies like cryptocurrency and central bank digital currencies have also been presented as "go-digital" solutions although there are still many reservations to be resolved and testing to be done. Finally, the booming fintech industry is serving as the innovation centre for technology-driven products that will revolutionize Africa's financial system. Therefore, more work needs to be done to introduce these solutions to every sector and facilitate their quick adoption